Auditor Response to Negative Media Coverage of Client Environmental, Social, and Governance Practices

Accounting Horizons, Forthcoming

47 Pages Posted: 9 Jun 2016 Last revised: 19 Feb 2019

See all articles by Jenna Burke

Jenna Burke

University of Colorado at Denver

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: February 2019

Abstract

We use new data to examine auditor response to negative media coverage of client environmental, social, and governance (ESG) practices. This coverage can be indicative of an increased risk of material misstatement, which is an important assessment in client retention and pricing decisions. Specifically, media criticism can threaten a client’s financial condition, as well as reveal management effectiveness and integrity issues that are further compounded by negative attention and related financial problems. We therefore predict that auditors will notice and incorporate media-provided ESG information in their risk response, which has not been examined by prior research. Supporting this prediction, we find that ESG-related negative media coverage of an audit client is associated with a higher likelihood of auditor resignation and increased audit fees. This response is incremental to the issues that underlie this media coverage. Overall, these findings identify an additional economic incentive for companies to avoid poor ESG practices.

Keywords: Negative media; ESG; RepRisk; risk of material misstatement; audit fees; auditor resignation

JEL Classification: D81, L14, M20, M42

Suggested Citation

Burke, Jenna and Hoitash, Rani and Hoitash, Udi, Auditor Response to Negative Media Coverage of Client Environmental, Social, and Governance Practices (February 2019). Accounting Horizons, Forthcoming . Available at SSRN: https://ssrn.com/abstract=2791570 or http://dx.doi.org/10.2139/ssrn.2791570

Jenna Burke (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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